U.S. Stock Market: Monthly Chart Sell Signals In BA, DD, GIS, K, & ORCL

For all intents and purposes, the U.S. Stock Market was effectively unchanged last week. The closely watched S&P 500 Index and also the Russell 2000 Index were basically flat, while the DJIA and DJTA were down ever so slightly (-0.56% and -0.36%, respectively), and the Nasdaq Composite was up modestly (+0.68%) for the week.

Given the fact that St. Louis Federal Reserve Bank President James Bullard predicted last week that the U.S. Central Bank will raise interest rates starting in the first quarter of 2015 (much sooner than almost anyone on the planet expects), the U.S. stock market showed remarkable resilience yet again to potentially serious bearish news.

“The Fed is closer to its goal than many people appreciate,” Bullard said on Thursday in an interview with the Fox Business Network. “We’re really pretty close to normal”, Bullard added.

Most major U.S. stock indexes remain close to all-time record highs, and global interest rates are close to record lows (at least on the short end of the yield curve). Valuation metrics looked "stretched" for many U.S. stocks, but corporate share buy-backs so far this year are at a record pace. Companies spent approximately $160 billion in the Q-1 2014 on purchases of their own stocks. And while Q-2 results are not yet available, it would not surprise me if the total Q-1 and Q-2 purchases exceed $300 billion. While I am not sure of the long term benefit to shareholders of buybacks when your stock is posting record highs, market bulls are certainly not complaining and are clearly in the driver's seat, at least for now.

As can be seen in the first chart below, my computer trading system has yet to trigger an official monthly chart sell signal in the S&P 500 Index (or ANY major U.S. stock index as yet). For most major U.S. stock indexes, the last monthly chart sell signal was officially triggered in July 2007. However, I think it may be noteworthy that monthly chart sell signals have been triggered this month in Boeing (BA) DuPont (DD), General Mills (GIS), Kellogg (K), and Oracle (ORCL).

My best assessment here is that these important individual stock sell signals are a warning sign of trouble immediately ahead for the broader U.S. stock market.

Interesting Postscript (added Sunday night, June 29th): The Bank for International Settlements (BIS) has warned that ultra-low interest rates have lulled governments and markets "into a false sense of security". In its latest annual report, the Basel-based organization  urged policy makers to begin to normalize rates. "The risk of normalizing too late and too gradually should not be underestimated," the BIS said. "Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally," the BIS said. It added that low interest rates had helped increase demand for higher risk investments on stock markets as well as in property and corporate bond markets.

While the BIS doesn't set policy, it does serve as a forum for central bankers to exchange views on relevant topics from the global economy to financial markets. According to the BIS, "Growth has disappointed even as financial markets have roared: The transmission chain seems to be badly impaired." The BIS said that policy makers should take advantage of the current upturn in the global economy to reduce the emphasis on monetary stimulus. And it warned that taking too long to do this could have potentially damaging consequences, by encouraging investors to take too much risk. "Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent." "The predominant risk is that central banks will find themselves behind the curve, exiting too late or too slowly."

The BIS was founded in 1930 and is the world's oldest international financial institution. The BIS's membership has more than 60 members including the Bank of England, the European Central Bank, the U.S. Federal Reserve, the People's Bank of China, and the Bank of Japan.

S&P 500 Index Monthly Chart with 3-Std Dev Bollinger Bands & 36-Month Moving Average Line

Boeing (BA) with 36-Month Moving Average Line and Computer-generated Buy & Sell Signals

DuPont (DD) Monthly Chart with 36-Month Moving Average and Computer-generated Buy & Sell Signals

Special Update: U.S. Stock Market - Key Change In Pattern Detected

Few would argue with the claim that a "passive" investment strategy, using index funds, has worked best for U.S. stock market allocations over the last five years. The S&P 500 Index has almost tripled from its March 2009 low (+192% to be exact) and the Russell 2000 Small-Cap Index has done even better with a return of 242% since March 2009, not counting dividends.

Maybe the academicians are right? Maybe we should all just pick a broad based index fund and then "buy and hold" forever? From March 2009 to today's close, the S&P 500 Index has posted a 22.67% compounded annual return, plus dividends. Wow! Easy money!!

However, for any investor who doesn't have tomorrow's Wall Street Journal or a working time machine, maybe it's too much to expect that all the market pitfalls over the last 15 years could have been avoided. And maybe it's too much to expect for investors to have had 100% cash in March 2009 and then turned on a dime to become fully invested overnight at the bottom.

In fact, if an investor had bought the S&P 500 in March 2000 instead of March 2009, his compounded annual return would be just 1.65% through today (plus dividends). And along the way, this same investor would have had to suffer through two 50% corrections.

Is there a better way? Yes, but that's a conversation for another day!

So why this Special Update? What can't wait until the weekend when I usually write this column?

Besides the fact that daily chart sell signals were triggered by my computer trading system in almost every major index at today's close, I think there was a meaningful change in the pattern of intra-day trade today. Until today, "negative economic news" was generally good for stock prices AND "positive economic news" was also generally good for stock prices, the best of all worlds for the bullish case. Negative economic news was generally viewed positively by investors because most believed that the Federal Reserve would then keep interest rates artificially low for an extended period of time. Positive economic news was also generally viewed as bullish for stocks for all the usual reasons (better corporate sales, earnings, economic growth, CapEx growth, etc.).

So what's so special about today?

It was reported this morning that U.S. New Home Sales jumped 19% in May to 504,000 annualized units, which shocked almost everyone. The consensus forecast called for just 440,000 annualized units. And the U.S. Consumer Confidence Index jumped to 85.2 today, its highest level since January 2008. The consensus forecast here was just 83.5.

Most U.S. stocks rallied on this positive news this morning (as has been the pattern), but then a major downside reversal unfolded. The CBOE VIX Index jumped to 12.13 at today's close, up 17% from Friday's intra-day low (only 2 trading days ago). Actual single-day volatility jumped to 10.04 today after posting two straight days near 2.0.

Here is the list of major stock index daily chart sell signals at today's close: DJIA, Nasdaq Composite, New York Composite, Russell 2000 Index, S&P 100 Index, S&P 500 Index. And here are the daily chart sector index sell signals: BKX, NDX, QQQ, IWN, XAU, GDX, SIL, MSH, and SOX.

Of course, the only buy signal triggered today was the SDS Pro-Shares double-short S&P 500 ETF!! In the interest of full disclosure, I have a major position in these SDS shares in my managed accounts.

And to add insult to injury for the bullish case today, the Dow Jones Transportation Average is now actually down for the month so far!

The following charts illustrate the bearish outlook for U.S. stocks immediately ahead (lots of Red Dot sell signals):

New York Composite Index Daily Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Daily Chart with Computer-generate Buy & Sell Signals

S&P 500 Index Daily Chart with Computer-generated Buy & Sell Signals

Dow Jones Transportation Average Monthly Chart with Computer-generated Buy & Sell Signals

Was There A Key Change In Market Volatility Last Week?

As mentioned previously in this column several times, I reside in Chicago, Illinois. More importantly, my home address is in the Hyde Park neighborhood where the University of Chicago dominates the landscape. 

My path to Hyde Park is a story for another time, but I attended the University of Chicago Graduate School of Business between 1975 and 1977 where I was fortunate to earn a Masters in Business Administration. I never really appreciated the experiences I had back then until the last decade or so. Some of my legendary professors included Merton Miller, Myron Scholes, James Lorie, and Roger Ibbotson. Myron Scholes and Roger Ibbotson, in hindsight, were the most influential on my eventual career path (options trading, valuation, and securities research). Eugene Fama, the latest winner of the Novel Prize in Economics, was also teaching at the University of Chicago GSB when I was there between 1975 and 1977. While I never attended any of his classes, our paths crossed on the campus tennis courts one afternoon back then where we rallied a few minutes before our actual playing partners arrived at the courts. For both of us it was an insignificant moment in time, but our paths would cross again about 35 years later. For me, this 2nd crossing was monumental, but I am a bit sad to report that for Mr. Fama this second crossing was even less significant than our first crossing and not the least bit memorable for him (LOL). Such is life sometimes for the great unwashed when in the company of royalty!

My two children attended school (K-thru-12) with several of Eugene Fama's grandchildren, and my wife and I are friends with Beth Fama and Chicago Booth Professor John Cochrane who are Eugene Fama's daughter and son-in-law. We were invited to a party sponsored by the Fama-Cochrane's and I had a chance to "reconnect" with Eugene Fama in a short one-on-one conversation. I "re-introduced" myself to him, made small talk for only a moment or two, and then asked him the single most important question of my life. "Mr. Fama" I asked, "is volatility a meaningful factor in predicting stock prices?" Mr. Fama didn't hesitate with his response. "We've looked at that and the answer is NO", with emphasis on the "NO". There was no rebuttal expected from me and none offered. That was it. Conversation over. Verdict in. No discussion or appeal!

While I was not surprised at Mr. Fama's response, I will admit to hoping for at least a short follow-up discussion. But the window was closed, and we were in fact at a party where "business" discussions are frowned upon and sometimes not even proper etiquette.

For those of you who would blindly accept Mr. Eugene Fama's verdict regarding the relationship between volatility and stock prices, there is no need for you to read the rest of this column. After all, Mr. Fama is the deserving winner of the latest Nobel Prize in Economics. And if there was a "Hall of Fame" for academia, Eugene Fama would surely be among the first voted in. However, as incredible as it sounds, I think Mr. Fama's conclusion regarding volatility as a predictor of stock prices may be "less than 100% accurate". My humble research would suggest otherwise. At a bare minimum, volatility is an interesting tool for anyone foolish enough to attempt to forecast stock prices. 

And for all those fools who might be inclined to listen to this fool, here's what I know and here's what I think it all means:

1. I believe that a major change in volatility is about to unfold across almost every market (stocks, bonds, commodities, and currencies). Please see chart below of current historical implied volatility for stocks and currencies.

2. The basis for this extraordinary claim is the significant uptick in actual volatility that was posted last week in the Gold and Silver markets.

3. Single-day volatility in Gold and Silver jumped to 23 and 38, respectively, last Thursday, June 19th. With a few exceptions, daily price volatility in both these key precious metals has been languishing between 2 and 10 this year so far. 

4. 10-day volatility in Gold and Silver has jumped to 17 and 30, respectively, up from 5 and 7 respectively in early June 2014. Please see charts below.

5. A buy signal was triggered within my computer trading system in the closely-watch CBOE VIX Index on Friday, June 20th, despite the fact that the S&P 500 Index  posted one of its lowest single-day volatilities on record at 2.40 for this same day! Please see charts below.

For argument sake, let's say that I am right in my prediction that a major increase in volatility is imminent. Since we are now near record lows in volatility, this prediction shouldn't be a surprise and may even be shared by many Wall Street analysts. The key question then becomes, what will a major increase in volatility mean to U.S. stock prices?

Bottom Line: A major increase in market volatility across all asset classes will probably be the direct result of a massive increase in "investor uncertainty" which will then quickly translate into sharply lower stock prices. In the interest of full disclosure, I am short the S&P 500 Index using the ProShares Ultra-Short SDS ETF in my managed accounts.

CBOE VIX Index Daily Chart with Computer-generated Buy & Sell Signals, & 10-Day Volatility

S&P 500 Index Daily Chart with 10-Day Volatility

S&P 500 Index Daily Chart with Single-Day Volatility

Silver ETF (SLV) Daily Chart with 10-day Volatility

Gold ETF (GLD) with 10-Day Volatility

Iraq - June 2014 - Rebirth Of A Black Swan

From Wikipedia:

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The theory was developed by Nassim Nicholas Taleb to explain:

1. The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology
2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

The "black swan theory" refers to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.

At the age of 60 now, and with more than 35 years experience studying and trading the financial markets, I view the recent surge in violence within Iraq as the "rebirth" of a potential Black Swan. I think you would be hard pressed to find many Wall Street advisers or research analysts who had predicted imminent civil war in Iraq, let alone what is actually happening now which looks to me like a major transformation of this country and potentially the entire region. In my book, we are just in the first chapter of a new dawn of disasters in the Middle East, and Wall Street investors appear blind to the potential negative consequences to U.S. stock prices immediately ahead and over the next several quarters, at least.

Weekly Chart Sell Signals were triggered by my computer trading system last week in the following stocks and indexes: BA, COST, DHI, DIS, DD, F, HON, JBHT, KR, LEN, MUB, PEP, RTH, SWC, UTX, VIA, WM, XAL (Airline Index), and HGX (Housing Index). Five of these stocks are "blue chip" components of the Dow Jones Industrial Average. Please see Boeing (BA) and DuPont (DD) weekly charts below.

Gold/Silver stocks were the number one performing stock group last week, with the closely-watched Philadelphia Gold/Silver Stock Index (XAU) posting a 6.46% gain on the week.

On Tuesday, June 3rd, I reported in this column that daily chart buy signals had been triggered that day by my computer trading system in several major Gold/Silver stocks and indexes. The June 3rd closing prices for those stocks and indexes are posted here along with closing prices from yesterday, June 13th. Please refer to my column dated June 3rd for more details.

                                                      June 3rd               June 13th         Change

Agnico Eagle Mines (AEM)              $30.48                 $33.29              + 9.22%  

Gold/Silver Mining Index (XAU)        $84.98                $92.30              +  8.61%   

Barrick Gold (ABX)                          $15.97                $16.98              +  6.32%

Endeavour Silver (EXK)                  $  3.90                 $  4.84              +24.10%

First Majestic Silver (AG)                 $  8.44                $  9.59              +13.63%

Fortuna Silver Mines (FSM)             $  3.93                $  4.63              +17.81%

Gold Mining Share ETF (GDX)        $22.37                $24.11              + 7.78%

Newmont Mining (NEM)                   $22.82               $23.40              + 2.54%

In my view, the rally in Gold/Silver mining shares is just getting started.

After posting its lowest close since 2007, the CBOE VIX Index (also known as the "Fear Index") rebounded 13.51% last week to 12.18. And just like with Gold/Silver stocks, I think the rebound in VIX is just getting started.

In the interest of full disclosure, I am long Gold/Silver stocks (AG, EXK, GDXJ) in my managed accounts and also short the S&P 500 Index with the double-short SDS ETF.

Boeing (BA) Weekly Chart with Computer-generated Buy & Sell Signals

DuPont (DD) Weekly Chart with Computer-generated Buy & Sell Signals

The U.S. Economy - Escape Velocity Achieved?

Central bankers took center stage once again in the week just past. The much-anticipated press conference by the European Central Bank on Thursday provided another boost for stocks in Europe and in the U.S., as ECB President Mario Draghi lowered short term interest rates (again) and also appeared to remove the so-called "sterilization" of monetary accommodation that had been in place (i.e. securities-market purchases had been offset by ECB actions to reduce bank liquidity). And equally important, Mario Draghi was emphatic in his statement to the press that the ECB is NOT done with its efforts to boost growth in Europe. However, he did stop short of introducing "quantitative easing" programs like those used by the U.S. Federal Reserve and the Bank of Japan.

Here in the U.S. on Thursday (June 5th), most stock index futures were higher in the morning ahead of the ECB press conference, but then sold off sharply in the middle of Draghi's statement. At that moment, for the 24th time over the last 18 months, I thought that the top in U.S. stock prices was in place and that a massive correction was underway. And for the 24th time my bearish view was immediately trashed as buyers stepped in and stock prices then advanced further into record high ground. While I didn't see the interview, David Tepper, the legendary hedge fund manager, apparently made some bullish comments in a CNBC interview at the time when stocks were selling off on Thursday morning. Mr. Tepper had been "cautious" on U.S. stocks in recent interviews, but he has apparently changed his mind and is now more constructive given this newest tranche of monetary stimulus from the European Central Bank.

For those who are regular readers of this column, you already know that I am aggressively short the S&P 500 in my managed accounts. Fortunately, I am hedged with a large position in Gold/Silver mining stocks which performed very well in the week just past. In hindsight, perhaps the words "Don't fight the Fed!" should have held more sway in my view of the financial markets. And maybe the words "Never sell a dull market!" should have also been a factor in my decision making. 

At this point, there are two key questions that need to be addressed:

1. Are Central Bankers omnipotent?

2. Has the U.S. economy reached "escape velocity"?

The first question is the easier of the two. Central bankers are not omnipotent, but they are clearly winning the day right now against the "gloom and doom" forecasters who see disaster on the near-term horizon. The printing press is a valuable weapon against the deflationary forces that have gripped many global economies over the last five years. And Central bankers are using this weapon with great success, but for how long? The U.S. Federal Reserve is already scaling back its quantitative easing program and will almost certainly complete this process before the end of this year. Is the so-called "Taper" of bond purchases another way of saying that the Fed is tightening? I THINK SO, but most stock investors don't seem to agree right now as major indexes continue to post record highs on a daily basis.

The second question is more complicated. In an ideal world, central banks are supposed to be there to smooth the business cycle and act as a lender of last resort. In my view, the U.S. Federal Reserve saved the world from a global depression not seen since the 1930's when it initiated massive quantitative easing efforts five years ago in response to the post-Lehman economic meltdown. And now, the Federal Reserve is scaling back its quantitative easing effort under the assumption that the U.S. economy has reached "escape velocity" and can generate sufficient economic growth on its own, without additional stimulus from the Fed. 

Is this a correct assumption? Has the U.S. economy reached escape velocity? 

U.S. stock market investors have voted with their money and they clearly say YES, as major indexes are marching higher on a daily basis and P/E multiples are expanding in kind. For stock market bears to be right, corporate earnings growth ahead must be less than forecast, which will then make the current expansion in P/E multiples unjustified. Bears also need the Federal Reserve to continue its taper program to its logical end. Since both of these outcomes appear likely to me, the current bull market is therefore doomed.

What else?

For the first time in many years, I am now seeing the word "melt up" in comments from many Wall Street pundits. For contrarians like me, this is music to our ears. I also see the words "new normal" everywhere. This, of course, is another way of saying "this time is different" when it comes to justifying the extreme valuation metrics that are currently being witnessed in the equities marketplace. 

Bottom Line: I continue to believe that a major top is being formed in the U.S. stock market and that a serious correction will begin very soon. In the interest of full disclosure, I remain short the S&P 500 Index against long positions in several Gold/Silver mining stocks. The Gold/Silver mining shares finally perked up last week, with many Gold/Silver issues rebounding 5% to 15% from recent intra-day lows. A weekly chart buy signal was triggered within my computer trading system in the Silver Mining Shares ETF (symbol SIL), which bodes will for continued advances in this sector. I strongly believe that Gold/Silver mining shares will be the star performers for all of 2014.

Silver Mining Shares ETF (symbol SIL) Weekly Bar Chart with Computer-generated Buy & Sell Signals

Special Update: Sell Signal In Transports Today; Gold/Silver Buy Signals

Just a quick note tonight after a very interesting day as far as my computer trading system is concerned.

Few would argue with the statement that Transportation stocks have been among the strongest in this 5-year bull market, and especially so over the last 18 months. The Dow Jones Transportation Average gained 108% from its October 2011 bottom to this week's all-time record high. This compares to a 74% gain in the S&P 500 Index over the same period.

Maybe it shouldn't be a surprise, but a daily chart sell signal was triggered within my computer trading system in the Dow Jones Transportation Average Index Fund (symbol IYT) at today's close (see chart below). And if there is additional weakness in this index over the next couple of days, a weekly chart sell signal will almost definitely be triggered as well. As far as I am concerned, if we see a weekly chart sell signal in the Dow Jones Transportation Average this week, the rest of the market will soon follow with a major correction of its own. Picking tops in any market is dangerous, but it's been quite some time since the bulls have been tested with anything more than a 7% correction.

Dow Jones Transportation Average Index Fund (IYT) Daily Chart with Computer-generated Buy & Sell Signals

As interesting as today's sell signal is in the Transportation sector, an even more interesting signal was triggered within the Gold/Silver mining sector today. Daily Chart computer-generated buy signals were triggered in the following Gold/Silver mining stocks:

Agnico Eagle Mines (AEM)              $30.48

Gold/Silver Mining Index (XAU)        $84.98

Barrick Gold (ABX)                          $15.97

Endeavour Silver (EXK)                  $  3.90

First Majestic Silver (AG)                 $  8.44

Fortuna Silver Mines (FSM)             $  3.93

Gold Mining Share ETF (GDX)        $22.37

Newmont Mining (NEM)                   $22.82

The sheer number of buy signals here is incredible! Of course, most of these stocks have been annihilated since their early February 2014 highs, but today's buy signals bode well for the group as a whole over the next several months (at least)! In the interest of full disclosure, I have significant long positions in Endeavour Silver (EXK), First Majestic Silver (AG), Goldcorp (GG), and the Junior Gold Mining Shares ETF (GDXJ). And I am also aggressively short the S&P 500 Index using the Pro-Shares Double Short S&P 500 ETF (symbol SDS).

First Majestic Silver (AG) Daily Chart with Computer-generated Buy & Sell Signlas

Junior Gold Mining Shares ETF (GDXJ) Daily Chart with Computer-generated Buy & Sell Signals